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Down With Cultural Sensitivity

How to do business in a "kleptocratic" society.

By E.J. Heresniak

E.J. Heresniak teaches economics and business in Shanghai as vice dean of Shanghai Guanghua College while pursuing business opportunities in what he calls the most fascinating place on the planet. His last article was "When Chinese Entrepreneurialism Meets Western Economics," in the Fall 2009 issue.

In China, except in big-name stores, every price is negotiable. As a foreigner, once you learn to emulate the hard-bargaining Chinese, you'll earn some respect. Bystanders compliment a foreigner who haggles like a local by saying he is "very Chinese." If a merchant asks for fifty, offer twenty or twenty-five. Hang tough, haggle, walk away. More often than not, the seller will shout after you or even chase you down the street yelling, "OK, OK, OK." Pretending one thing (that there's a firm price) and then doing another (accepting a markedly lower payment) is part of the culture. Nobody bats an eye.

Theft is officially frowned upon in China, but it, too, is part of the culture. Stealing and copying ideas is so common that the Chinese word for it, shanzhai, is now part of the business-English lexicon. Tom Adams, a friend of mine and CEO of Rosetta Stone, the U.S. company that makes language-learning software, got so burned by Chinese software pirates that he calls China a "kleptocratic society."

More than a year ago, I found hundreds of copies of Tom's products in a huge subterranean shopping mall at the Science and Technology Museum station of the Number 2 line of Shanghai's subway system. Ninety percent of the mall is devoted to gray-market wares, everything from shoes and electronics to Tommy Bahama shirts. I sent Tom some photos, and we agreed that his kiosk strategy that worked so well in America was a smash hit in these types of Chinese malls too—except they weren't official Rosetta Stone kiosks, so he never saw a cent from the sale of the pirated software. In addition, illegal sellers of Tom's products were hawking copies of the software, including a patch to bypass the Rosetta Stone registration feature, for about ten bucks. Tom's company retails its packages for twenty times that—too expensive for a typical Chinese worker.

Do evil and get away with it, and you are considered cleaver—and probably rich. Do evil and get caught, and you're a chump.

My most blatant encounter with Chinese thievery came when a former student at Jimei University, where I taught business strategy, recently asked for my help with his business idea: selling real and fake Nike shoes on the Internet. One of his friends had already made half a million dollars in the business, and my ex-student intended to copy him. He wanted help to make his website look "Western" to increase the confidence of potential buyers in Europe and America. Young guys like him use PayPal and credit cards and have plans to employ multiple company names and bank accounts, anticipating that they'll be shut down from time to time as financial intermediaries try to police their businesses. They get their shoes from dozens of Chinese factories, some of which manufacture authentic Nikes and other famous brands, and then make additional money by covertly selling out the back door to local Chinese entrepreneurs. This former student and his friend have a deal with a couple of these Nike factories, which sell them sneakers for $14 a pair—allowing these two guys to undersell Nike by 40 or 50 percent. They also know enough to keep their business relatively small—no 40-foot container shipments—so they won't appear on Nike's radar.

When we discussed Nike's investment in time and money to build its brand and the propriety of stealing the fruits of their labor, the former student and his partner simply said they didn't have similar resources to create their own brand. They confided to me that their way is "the Chinese way" and offered to coach me so I could make money, too. Their plan, espoused with earnest sincerity and not a glimmer of guilt, was to make enough money from this larcenous venture to one day have the cash to build their own brand or start some other business. Many Chinese consumers, though, seem less interested in purchasing quality locally made sneakers than in buying into a piece of American pop culture by acquiring Nikes—real or fake—despite the fact that some Chinese-brand athletic shoes actually seem of higher quality than their Western competitors. I have no idea why Chinese sneaker companies aren't marketing them worldwide.

I told these two entrepreneurs that they should throw in a free pair of the Chinese shoes with every pair of the real or fake Nikes they sell—I don't think it would take too long before their customers would ask for the Chinese brand. Still, if the factory is willing to sell to them for $14 and still make a profit, you do have to wonder why the sneakers retail for nearly $100 a pair in the States. Because of this, these two men insist, it's actually Nike that is ripping off everybody.

Respect for others' intellectual-property rights does not seem to be in the Chinese psyche. Many Chinese business people have told me candidly that the Chinese government turns a blind eye to "how we do business in China." The only exceptions are when the nation needs to "play a game" to placate Western sensitivities. The best example of this occurred just prior to the opening of the World Expo in Shanghai. Big posters appeared in the large underground shopping malls adjoining the People's Square subway interchange, asking people to report incidents of copyright infringement to the police; specifically, they warned of fake Expo souvenirs and logos. This subway interchange is the most popular one for foreigners, the Times Square of Shanghai, and I was not altogether surprised to see no similar posters in any other subway station—particularly at the one with the market selling Tom Adams' pirated software.

In my three years in China, I've found the vast majority of the people to be friendly, helpful, and honest when I buy things such as food or regular everyday stuff. I've never had anything stolen; I've even had lost items returned to me. A cashier at a small grocery store once tracked me down to return some change because he miscalculated the bill. But the higher-level business people—the owners and bosses—lie, cheat, and steal with no remorse whatsoever and have not the slightest respect for the work of others. None. They get away with all kinds of things because they can.

It all speaks to the notion of "face" and "harmony," big deals in China. Face, which seems to boil down to the appearance of being clever and important, trumps everything else, and losing face, or looking bad publicly, is terrible for people, be they top officials, businessmen, or even thieves. Do evil and get away with it, and you are considered clever—and probably rich. Do evil and get caught, and you're a chump. I've seen this in action in employment disputes, student study habits, government bureaucracies, and corrupt middlemen. Meanwhile, Confucius taught harmony, which requires unquestioning fealty to leaders with power: parents, bosses, politicians. I am no student of Confucius, but my sense is that invoking harmony is one way that Chinese bosses and politicians maintain control.

The Chinese frown on confrontation, and it hurts Westerners doing business in China when they defer without question to this aspect of Chinese culture. But in the spirit of political correctness, Western businesspeople can forget that there's nothing correct about corruption. It's drummed into the heads of Westerners that they must accept nonsense in China, so it takes guts and staying power for foreigners to go against the popular myth that in dealing with the Chinese, one must defer to their five-thousand-year-old culture. Quietly accepting kleptocratic behavior is kind of like accepting shrinkage in retail without putting up any barriers. That's nuts.

I think the way for Western business people to gain respect and take back control of their businesses is to cause a little dissention. I think Tom and his counterparts at Nike and other corporations ought to take out full-page ads in The Wall Street Journal with photos of rip-offs, naming names and naming places. And they ought to try running the same ads in the Chinese papers too, especially the English-language versions, which will cause the most ruckus. Rosetta Stone, in particular, has an edge. The Chinese do not need Nikes, but they desperately want to learn English. Tom's software, properly tuned to the Chinese market—where everybody knows some English but won't speak it because the oral English instruction they get is subpar—can help fill an enormous gap. The Chinese need Tom's software, for they will never find enough native English speakers to train their kids. If he takes a real stand and gains some face and allies in the Ministry of Education, he can make a bundle in China. Even Nike, with its overpriced running shoes made with cheap labor, provides thousands of jobs in China. That's leverage.

It's like bargaining with the street vendors. If you don't bargain hard and get taken by a crafty Chinese merchant because you felt as though you had to be respectful of him, thereby acting too docile, you lose respect. You lose face. Westerns should no longer be losing face by playing by China's unspoken cultural rules.

I think Google had it right. They lost some business when they raised hell about code hacking and pushed back on censorship, but they also gained face because they didn't just roll over with a "this is China" shrug. Likewise, by putting the Chinese in a position in which they are publicly called out on cheating and raising some hell, Westerners can use the notion of face to gain respect for intellectual-property rights. Foreigners in China have to be willing to hang tough, haggle, and walk away. OK, OK, OK?

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The Conference Board Review is the quarterly magazine of The Conference Board, the world's preeminent business membership and research organization. Founded in 1976, TCB Review is a magazine of ideas and opinion that raises tough questions about leading-edge issues at the intersection of business and society.